J.D. Vance and Elon Musk re: ChinaVance and Musk both touched on China this week, what's the takeaway?
This last week, J.D. Vance went on Fox News to proclaim that the administration is going to do something about American middle class kids getting replaced in American universities by Chinese oligarchs. His comments centered on how the oligarchs can “pay full freight” and so universities are taking their kids instead of American kids. The comments are a part of the administration’s larger foreign policy focus on China. And while the administration is highlighting all of the aggressive ways it is going to combat China in the foreign policy realm, they are barking up the wrong tree, because the competition with China isn’t based in foreign policy. “Defeating” China, or outcompeting China, or whatever words they want to use, cannot be accomplished by militarizing the pacific or building new weapon systems or a bigger navy. The fact that the vice president is talking about US universities should clue them in on that. This competition can only be won by changing domestic incentives for the people who consistently sell out America like Elon Musk, a man so deeply in bed with China on the business front that America went into an uproar when it found out he might get a secret brief on China this week. This is a deep look into the history of how we got to where we are vis-a-vis China, and how to fix it without war and without military intervention. I first published a version of this as “The China Hack” in the American Prospect, a publication I highly recommend checking out. In the 1990s, satellite communications were taking off. Demand for space launches was high, but supply of vehicles was low. The U.S. satellite industry was on the prowl for cheap rocket rides into space. The space shuttle was no longer accepting commercial payloads, and there were only so many Delta and Atlas commercial launches to go around. European launches were an option, but they were not cheap, and the U.S. satellite industry wanted to do better. As if in answer to their prayers, the Chinese Communist government stepped up to the plate, offering the industry rides on its Long March rockets for fully half off the going rate. Strictly speaking, the industry couldn’t take China up on the offer. At least not right away. China was sanctioned by the U.S. government for doing nasty things like proliferating missile technology to other countries. Also inconvenient, these rockets that the U.S. satellite industry was eyeballing were the same ones China was improving for its intercontinental ballistic missiles—some of which were said to be pointed at U.S. cities. But from their perspective, the market savings far outweighed any pesky national-security concerns. And besides, they hadn’t been building political clout for nothing. Mike Armstrong, CEO of Hughes Electronics, the leading U.S. satellite builder, made gaining access to Chinese launches his mission. He relentlessly lobbied and browbeat Congress and the Clinton administration. He cozied up to Chinese space officials, who were eager to work with him, going so far as to serve as their intermediary in Washington. On their behalf, he told top U.S. government officials that it was “obvious” that “the Chinese are committed not to proliferate missile technology,” despite all indications that this was not true—and which hindsight confirms was not true. Armstrong wasn’t alone. He had a strong ally in Bernard Schwartz, the CEO of satellite maker Loral, who during this time became one of the Democratic Party’s biggest funders. Eventually, the government relented. The satellite industry had its prize: cheap Chinese launches. Only, as is often the case when things seem too good to be true, Hughes and Loral quickly discovered why the launches were half the price of European ones. The Chinese rockets kept blowing up! Their satellites were destroyed long before they ever made it to space. Chinese officials investigated each failed launch, but couldn’t figure out what had happened, and therefore couldn’t get things right. Hughes and Loral were undeterred. If they could just fix the Chinese rockets, they would experience a windfall … So they pursued their corporate interests and sent over investigation teams to help China figure out what went wrong. It was a boon for the Chinese rocket program. Not only did the companies show the Chinese Communist government how to fix their rocket design, load analysis, and launch operations; but they also taught China how to properly conduct post-mishap investigations and analysis that could be used for future accidents in perpetuity. It was a match made in economic heaven. The satellite companies saved a bundle of money, and the greatest cost for doing so—China learning how to improve the ICBMs aimed at American cities—didn’t register on their corporate balance sheets at all! At the same time that Hughes and Loral were boosting their bottom line by reducing American security, China was busy conning another American company out of yet more missile technology by dangling a massive commercial-airliner deal before the executives and shareholders of the nearly bankrupt McDonnell Douglas, who were desperate to stay in business. The Chinese airliner market was closed to foreign aircraft. The deal would have been an incredible breakthrough. There was just one teensy catch. China first needed McDonnell Douglas to prove it was a serious partner. They made it clear that the only way there would be a deal was if McDonnell Douglas sweetened the pot by selling some of its military aircraft and missile machining equipment to China’s main military purchasing arm. For McDonnell Douglas, it was a no-brainer. Every corporate incentive pointed to China. Plus, the Chinese Communist Party pinky-swore that the machines wouldn’t be used for military purposes, so there was nothing to worry about. U.S. authorities, desperate to keep McDonnell Douglas in business, agreed to allow the sale under strict conditions. So the company rejected an offer from the plant’s workers in Ohio to buy the machines and keep producing in the U.S., and instead sold and shipped them to China for a song. Once China had the equipment in hand, they violated the U.S. conditions, diverted the machinery directly to a military missile production facility, and killed the deal to buy American airliners. China had its missile equipment, and McDonnell Douglas never sold a single aircraft to China. Congress was outraged. How could Hughes, Loral, and McDonnell Douglas all let this happen? From the U.S. point of view, the conclusion was that a few selfish companies took advantage of our political system with bad results. Heads shook in disbelief. Speeches rang out in the halls of Congress. Investigations commenced. All future satellite launches from China were banned. McDonnell Douglas was indicted. Some fines were dished out—significantly less than the companies had stood to gain—but no one went to prison. Prison is for spies, not for profiteers, regardless of the level of tech transfer. Armstrong became chairman and CEO of AT&T and then Comcast. Grim handshakes were made all around. Some damage was done, but the problem was solved. Except that it wasn’t. Because this isn’t actually the story of China incentivizing U.S. companies into helping improve their missiles. That’s nothing. This is the story of how, 25 years later, in the midst of a global pandemic, America woke up and realized that it was completely dependent on Chinese manufacturing for everything. Not only for cheap toys and tacky trinkets, but for essential things like medicine, electronics, and military components. The scope of what we were and are currently incapable of doing is astonishing. According to congressional hearings on the impact of the first Trump tariffs, among other things, we cannot print our own Bibles, manufacture rifle scopes, or even make the special ink to print U.S. dollars without Chinese assistance. It is as embarrassing as it is dangerous. And it begins in the ’90s when the Chinese government discovered a fresh vulnerability in our economic system. A vulnerability they exploited with Hughes, Loral, and McDonnell Douglas, and that they have been exploiting ever since, up to and including their relationship with Elon Musk. This, in short, is the story of how China hacked America. The VulnerabilityOn March 17, 2020, Geng Shuang, China’s Ministry of Foreign Affairs spokesperson, speaking on behalf of an authoritarian communist state with a state-run economy, lectured the world on economic freedom (isn’t that ironic?). His goal was to preempt the idea of the U.S. decoupling its supply chain from China: “The global industrial and supply chains are the results of market forces and business decisions,” he said matter-of-factly. “It is unrealistic and insensible to try to sever them.” These two short sentences from Spokesman Shuang are the essence of the China Hack. The market is magical. Supply chains are built by trillions of individual economic decisions. They are the result of natural forces. To meddle with such a beautiful natural thing is folly, and can only lead to destruction, says the state that constantly does that very thing to its own benefit. Since the 1980s, when the Chicago school style of economics really took hold, America has heavily focused its economic structure on one fairly simple principle: the pursuit of self-interest. The philosophy goes something like this: If everyone just looks out for themselves, and government stays out of the way, the so-called invisible hand will take care of the rest, and society will self-organize efficiently and effectively. For corporations, which we view economically as individual actors, the pursuit of self-interest, at least since the shareholder revolution in the ’80s, means maximizing shareholder profit. In fact, according to the theory, it is not just preferred that they maximize shareholder profit, but it is actually their social responsibility to do so in lieu of anything else China noticed this aspect of our economic philosophy and, at some point in their dalliance with Western capitalism, the Chinese Communist Party figured out that corporations and individuals, not the government, control nearly everything in America. Natural resources, intellectual property, entertainment, culture, ideas. And when China paired that knowledge with their observation of our intense duty to individual self-interest, the hack was born: Make it profitable for individuals, institutions, organizations, or shareholders, and they will hand the keys of the American castle over to China one piece at a time without thinking twice. In fact, it will be their social responsibility to do so. It wasn’t a particularly new or innovative idea. Vladimir Lenin saw the opportunity a century ago: “They [capitalists] will furnish credits which will serve us for the support of the Communist Party in their countries and, by supplying us materials and technical equipment which we lack, will restore our military industry necessary for our future attacks against our suppliers. To put it in other words, they will work on the preparation of their own suicide.” But the Soviets couldn’t take advantage of our fundamental flaw because our predecessors understood the risk and never allowed our systems to integrate. Plus, unlike the Chinese, the Soviets had few products the West wanted; and Cold Warriors recognized the USSR as a prime geopolitical adversary. For a long time, America refused to deal with non-free-market societies. But as time passed and the Soviet Union collapsed, Nixon made his famous overture to China—and our business sector set their sights on big, juicy, billion-person China, which was a more complex hybrid than the USSR. It had all the right ingredients. Cheap labor. A massive market. Indifference to the environment. And growing competence at manufacturing. American businesses lobbied our policymakers hard for the opportunity to take advantage of those incentives. In pursuit of individual self-interest, we pushed aside China’s human rights record and our tradition of only dealing with countries that bought into our system. If we brought them our trade, so the thought went, our values would follow. This became the U.S. government line as China was welcomed into the WTO with no conditions. Only China didn’t change. Instead, unwittingly, we worked “on the preparation of [our] own suicide.” Because China understood that we would blindly pursue profit over principle, and seduced every sector of business and manufacturing the same way they seduced Hughes, Loral, and McDonnell Douglas. This isn’t in the past—it is still happening today. The NBA cracking down on a general manager and Blizzard Entertainment banning a professional gamer for supporting Hong Kong protesters. Hollywood studios never criticizing China—and actually working with the Communist Party to modify their films. Apple TV does the same. Tech companies (Apple again), airlines, Marriott, the Gap, all self-censoring and kowtowing to the Chinese regime. Wall Street bankers hiring Chinese Communist Party “princelings” in order to get business and access. Elon Musk actively killing a bipartisan anti-outsourcing provision in a budget bill in order to protect his investments and activities in China. The consolidation of our own markets has created another incentive for companies to work with Chinese companies. Staples and Office Depot, unable to fight Amazon alone on the home front, turned to a joint venture with China’s version of Amazon, Alibaba, in order to kick-start their e-commerce. Likewise, Verizon turned to Alibaba for its cloud server in order to circumvent the predation at home. It’s a uniquely modern American mentality that places all other principles behind the greatest principle of all: the pursuit of self-interest. Exxon CEO Lee Raymond summarized the attitude best: “I’m not a U.S. company and I don’t make decisions based on what’s good for the U.S.” Exploiting that philosophy, along with our focus on deregulation and a trust in the magic of the market, is the foundation of how China took control of our entire supply chain, numerous industries, and know-how that America, as a society, paid for and developed, and even a huge slice of “materials and technologies deemed strategic and critical to U.S. national security The ExploitA common talking point on Chinese tech transfer is that China “steals” our tech. But outright theft is a minor part of the story, and if we focus on theft we miss the more fundamental dynamics of how U.S. industry serves as Beijing’s enabler. It’s true, China does commit outright blatant theft, but often even the theft wouldn’t be possible without the access China acquires by taking advantage of our corporate pursuit of narrow self-interest. So while theft is one of a variety of tricks China employs to acquire our technology, the primary mechanism behind the transfer is hacking our dedication to self-interest. There are easy-to-find examples in every realm of tech transfer: education, employment, production, and investment. Let’s look at Vice President Vance’s beef with Chinese students in our education system. China places full-paying students, often members of the People’s Liberation Army, at Western universities. Likewise, non-military Chinese students come here and pay full tuition, as Vance talked about. These students conduct research at our universities, often targeting emerging tech with military implications, and then they take what they’ve learned back to the Chinese regime. This represents a massive transfer of technical expertise. According to a DIUx report on tech transfer, approximately 25 percent of U.S. STEM graduate students are Chinese nationals, and most Chinese students now return to China after they graduate. It’s easy to demonize the universities, and public officials even before Vance have attempted to stem this transfer by appealing to national pride, including during Trump’s last administration through a persuasion campaign led by the White House’s Office of Science and Technology Policy to ask the universities to be more vigilant. But these appeals fail because vigilance is not the problem. Our universities, like our corporations, must operate by the golden rule of our system, the pursuit of their own self-interests, or they will fail. Higher education is a competitive world, fueled by dollars and discoveries. This is particularly true because our legislatures have defunded higher education for years, to the point that the universities have to have the full-paying tuition students, the STEM students, and the research money that America and American states aren’t providing them. So they get them from China. Which allows China to exploit our institutions and federal research funding toleapfrog us in key technologies like quantum computing. The Senate Subcommittee on Homeland Security and Governmental Affairs completed a report on this exploit, exposing how “American taxpayer funded research has contributed to China’s global rise over the last 20 years.” Kicking out oligarchs’ kids doesn’t solve the root of the problem. If the administration is serious about fixing it, and getting deserving middle class kids back into universities, re-investing in higher education is the way to do it Just as universities are short on full-paying STEM students, U.S. businesses and other institutions, led by the DOGE Bros Musk and Ramaswamy, claim to be short on tech talent and say they need Chinese and other foreign tech workers. This gives them the cheaper labor that they want, but also opens them up to greater espionage risk and the transfer of technology through workers. The Senate report mentioned above examined China’s Thousand Talents Program, which recruited over 7,000 researchers and scientists between 2008 and 2017 to sign binding contracts with the Chinese government. These contracts did things like give the regime intellectual-property rights in work conducted by the employee in the U.S., require the participant to replicate research they did for their U.S. employer when they returned to China, and require them to train or recruit Chinese government–approved students to work for them in the United States. U.S. companies and institutions are not unaware of the risks, but they wanted cheaper workers so that they could pursue their company’s own self-interests, and they hired them. For years, China tempted U.S. businesses with cheap labor. In a well-known story, the business world, following their duty to maximize profit, shipped millions of jobs to China. Along with those jobs, they sent highly qualified experts to China to set up the industries, infrastructure, transportation, machining, organization, and all elements of light industry and advanced manufacturing. The investment was deep, complete, and fully in the interest of these companies. “It’s taken us 30 years to build our production base in China,” said toy maker CEO Jay Foreman when summing up why his company, like 87 percent of those surveyed by the US-China Business Council, was not leaving China despite the first round of Trump tariffs. It is not just jobs that are lost when these facilities move overseas. Manufacturing is not static—it evolves constantly. Thirty years of building out production bases in China includes 30 years of manufacturing innovations, improvements, and expertise that have been captured by Chinese manufacturers and lost to America. Along the same lines, when these businesses weren’t building up China’s production base, they were transferring their intellectual property to China through things like forced joint ventures with Chinese firms or oppressive Chinese disclosure requirements for product approvals. Thus, alongside a deep investment of corporate time and money in China has come a massive transfer of technological know-how and expertise that has left us reliant on Chinese manufacturing for everything from solar panels to missile components. All in the name of corporate self-interest. Until the incentives are changed, the transfer is not going to stop. There is just too much for these businesses to gain. China learned this early on, from Hughes and Loral. Industry’s response to the congressional report finding that the companies damaged national security was to double down on prioritizing their own self-interest over national security. “If the report takes steps to take [export laws] back to times like the Cold War, that’s a mistake,” said Mark Rosenker, spokesman for the Electronic Industries Alliance, a trade group. To corrupt a phrase from Dr. Seuss, “Business is business and business must grow, regardless of national security, you know.” China understands how our pursuit of self-interest works and, rather than treat it as some mystical force that cannot be influenced but only admired, like we do, they harness it to their own ends. The FalloutThe obvious spoils of the hack for China are immense. A country they consider a direct competitor and adversary is reliant on their production for almost everything, including components and materials for almost every military end item. They are inoculated from the world’s greatest propaganda machine, Hollywood. And they can now make pretty much anything they want as well or better than anyone else in the world. But the biggest benefit of the hack to the Chinese government is the massive transfer of invisible wealth it represents. To understand this transfer, it is important to look at the life cycle of an industry and what it costs a society to create an industry or product at any given point in time. The societal cost to be a first mover, and initially create an industry or product, is quite high. The resources of the entire country go into it: education system, infrastructure, energy, protecting or exploiting the environment, limited physical resources, time, policy, subsidies, other opportunities, and legacy discoveries—which are products or technology that cost resources in the past, like the internet, GPS, and touch screens, and that become the foundation for new tech and research and development. As an industry or product matures beyond the initial stages or prototypes and enters early generations, the cost to enter the industry often goes down. In competitive market economics, entering here is sometimes called a second-mover advantage. Then, as advantages get worked out and winners take control, production, the market, and the expertise consolidate. This is particularly true in the U.S., where the financial industry strongly prefers, rewards, and reinforces monopoly positions. Often, the technology becomes more advanced and inaccessible. Entering a post-consolidation market at this point is extremely costly and even prohibitive depending on the degree of consolidation and things like rent structure, intellectual-property regimes, trade structure, or regulatory capture. A society that controls an industry at this point becomes a monopolist, creates the rules and standards for the industry, and creates dependencies in all other countries that want the product. A good current example of this was Huawei’s comparative advantage in parts of 5G telecom hardware production. A 2018 assessment of the defense industrial base and supply chain describes the impact of this consolidation in defense: “China is also the sole source or a primary supplier for a number of critical energetic materials used in munitions and missiles. In many cases, there is no other source or drop-in replacement material and even in cases where that option exists, the time and cost to test and qualify the new material can be prohibitive—especially for larger systems (hundreds of millions of dollars each).” The United States has long been a first-mover country technologically, which takes a lot of societal resources. This can be a great thing. New industries and products are exciting; they improve our lives; they keep our economy humming; and they keep us at the cutting edge of the world economy, academia, and defense. But it’s resource-intensive, and the cost is forever locked in. We paid what we paid to get in. The biggest payoff of the China Hack is how it has allowed China to enter or capture our industries at the lowest possible point on the cost curve. We pour resources into creating these industries; China then purchases or lures production and expertise to its mainland, learns the business, either captures the foreign businesses or gradually replaces them with domestic ones, and waits for or subsidizes the consolidation of the market. As a country, the U.S. doesn’t pay attention or do anything until the industry is long gone and there is a crisis. Rare earths, telecommunications equipment like 5G, and pharmaceuticals are great examples of industries we created, shed, and, only during crisis, realized we needed to get back into. At that point, getting back in means re-entering a consolidated market, where the cost is huge. Even in industries where China doesn’t get our stuff on the cheap and muscles in with state-backed power, like solar panels or small consumer drones, we end up in the same position: staring down a cost-prohibitive re-entry into the market. The result of all of this is that the U.S. is doing the least efficient thing possible: buying high, selling low, and trying to buy high again! How does a national economic system based on individual economic efficiencies result in such an inefficient result for the U.S. as a nation? The answer, and the brilliance of China’s strategy, is that societal cost and risk are not included in the calculus of the people making the individual business decisions of these industries. China looks at business transactions at the nation-state level, and the decisions are guided by national interests and decision-makers. But in the U.S., these decisions are based upon the individual self-interests of founders, boards of directors, investors, families, or other groups of individuals. When these individuals look at risk, it’s not their job or in their self-interest to consider national risk. Whether it is national security, espionage, supply chain fragility or dependencies, or something else, the cost of this type of risk is completely invisible to them. The only risk that appears on their balance sheets is the risk to their own profits. In the case of moving to China or accessing the Chinese market, it’s been an easy decision. The profit companies make by engaging in China far outweighs the loss of IP to a joint-venture partner or to the Chinese government. Dan Harris, a Seattle-based attorney advising businesses eyeing Chinese markets noted this in a CNN Money article: “The thing is that the foreign companies that give up their technology usually do so at least somewhat of their own volition. Yes, maybe they need to do so to get into China, but they also have the choice not to go into China, right?” Selling out to China was probably an even easier decision. The cost of a company to its U.S. owners only includes their own inputs, and doesn’t reflect all the societal inputs that went into the company. For China, however, the value of the company is much greater than what U.S. owners think it’s worth, because it offers a technological shortcut and/or a path to a monopoly position. Because of this baked-in value that is invisible to the owners, they sell for both a personal profit and a societal loss. The rare-earth magnet industry epitomizes this type of loss. The U.S. government, through the Defense Advanced Research Projects Agency (DARPA), partnered with private industry to develop the magnet technology. Once the technology was developed, the original partner decided to sell the magnet developments and move on to the next thing. This wouldn’t have been a big deal if the industry had stayed in U.S. hands. The federal investment was made to create the industry in the U.S., and the industry would have been here. In this case, however, China stepped into the buying chain. A U.S. hedge fund, Sextant Group, partnered with the sons-in-law of the Chinese premier, bought the industry, and moved the whole thing to China, leaving the U.S. completely dependent on China for an industry it funded and developed and a technology that goes into almost every smart weapon, aircraft, and communication item in the U.S. military. The sale was a coup for China, a disaster for U.S. society, bad for the U.S. workers in Indiana who lost their jobs, and a big win for the private businesses and hedge fund that converted the unaccounted societal inputs, national-security risk, and supply chain risk into profit by selling to China. Every time this happens, China gains an incremental advantage in its competition with the U.S., and the U.S. gains another supply chain dependency on China. Or, in the case of something like the sale of AMC Theatres, a restriction on freedom of expression. The Foundation of ChangeThis can all be changed. We choose our economic system and its attributes. And if the time were ever right to create a “security patch” to protect our programming from the China Hack, it’s now, while policymakers are focused on it. But it’s going to take three distinct changes in mindset, which add up to more than a patch, and have nothing to do with hardlines against China or foreign policy. The first is abandoning the religion of market mysticism. Market mysticism is the idea that “the market,” short for basically the sum of all commercial interactions, is a sacred, natural, and untouchable force. The idea espoused, disingenuously, by the Chinese Communist spokesman that humankind can never govern the market, because it is already perfectly ruled by magical laws like self-interest. On the contrary, the Chinese Communist Party has proved brilliant at governing the market in China’s national interest. A few years ago I had a conversation about Department of Defense supply chains with a retired admiral who once led a prestigious U.S. combatant command. The admiral vociferously complained about consolidation of the defense marketplace, but shrugged his shoulders when I asked him what the best approach to fixing it would be. If only the market had not dealt us such a poor hand, he lamented. When I suggested the immense market power the Department of Defense could bring to bear on the situation, particularly through the concerted effort of the undersecretary of defense for acquisition and sustainment and the deputy assistant secretary of defense for industrial policy, he was taken aback. It was as if I had suggested that we water the crops by asking the clouds for some rain. Foolish and impossible. This mindset is pervasive, and it is wrong. Alan Greenspan, once a true believer and pontiff of this religion, began to recognize it in 2008, when he testified about the flaw in his economic ideology before Congress—as the result of that ideology savaging our economy. The market is not magic. It is a social tool consisting of a set of interactions governed by rules, policies, and traditions. It can be manipulated, modified, and managed in an infinite number of ways. It is the programming, and we are the hardware. We code it with our laws the same way a coder writes script. China knows it, they have hacked it, and until we recognize the reality and apply some new code, we will be vulnerable and exploitable. The second change in mindset we need to make is to acknowledge that industries, corporations, intellectual property, and universities are national assets created by national policies and resources, and that they actually can be answerable to the society that incubates them. Like market mysticism, there is a pervasive idea baked into our system that new technologies, services, or devices spring out of American garages and minds through sheer force of will. This could not be further from the truth. This is not to diminish the accomplishments of individual Americans, but to recognize the society we have built and implore policymakers to tweak it so that we can save it. American innovation is not the result of the U.S. having the world’s coolest garages or a monopoly on genius. U.S. innovation has always been fostered on a foundation of law, tax code, rights, regulations, freedoms, attitude, security, education, infrastructure, energy, and numerous other things. These social and economic aspects and policies—our coding—govern the results. And when the results are diminished or become compromised, we need to modify them to meet the challenge. Many of the great inventions and products we love and enjoy today are the product of direct market interventions. Sometimes through carrots like government funding and incentives, and sometimes through sticks like antitrust actions that crushed monopolies and allowed new businesses and innovations to sprout from garages and flourish. The third and arguably most important change in mindset is that our political leaders, policymakers, and thinkers must embrace the courage to lead. Market mysticism is easy. Believing in it means that you are never at fault, it’s just the market! It relieves leaders of all responsibility for what happens. Abdicating responsibility, though, is how we lose. It’s how China takes control of our crown jewels and then blows right past us. The threat is not the future. It is now. In 2019, China became the first country in history to surpass the United States in annual international patents. That same year, it also passed the U.S. in artificial-intelligence patents. The goal of these mindset shifts—rejecting market mysticism, embracing society’s role in governing the economy, and developing the courage to lead—is not to reject our current system. The goal is to strengthen and revitalize a system that has begun to decay. We must adopt an industrial policy that modifies our economic coding to better harness the power of free markets and fix vulnerabilities like the China Hack. The Fix(es!)There are a lot of industrial-policy tools at the policymakers’ disposal for addressing the China Hack, and they should be mixed and matched and experimented with for the best result. The key is always to keep in mind that if a given policy does not modify the incentive structure that allows for the China Hack, it is unlikely to succeed. Therefore, fixes need to embrace one or more of the below strategies. 1. Raise the private cost of offshoring or selling out to China to reflect the true cost of the assets being sold or offshored.The goal here is to transfer external costs like the national-security cost of Loral and Hughes improving Chinese rockets, or Sextant Group teaming with China to sell our rare-earth industry overseas, from our national ledger onto the companies’ balance sheets. We could do this by closing loopholes that allow them to convert national risk into private profit or transfer the fruits of national resources like basic research, infrastructure, or education to adversaries like China for private profit. This goal could also be achieved by artificially increasing the cost of selling to China, or another entity hostile to our system, through a targeted tax or penalty scheme. For instance, a product or technology created substantially thanks to publicly subsidized R&D would have to reimburse the government for the cost if the company sold to China. Or the U.S. government or perhaps a public trust could have something like “dormant” shares in corporations that are subsidized by public funds. These shares would vest whenever a company attempts to move or sell overseas, and the company would have to buy them out before moving or selling. Ideas like these would keep the private cost low for regular transactions but raise it in the China context. Further, strict penalties for bad actors like Hughes, Loral, and McDonnell Douglas must be applied and enforced. When the likely punishment for a bad act is a fine of an amount less than a company stands to gain from a bad act, the incentive arrows all point toward risking the bad act. Likewise, when an executive who makes the decision to behave badly is rewarded by industry, like Mike Armstrong, there is no incentive to avoid the bad act. 2. Lower the initial cost of entry into an industry for U.S. producers.We can lower costs by coming in as a second mover on some targeted technology. China has even shown us how: Stealing tech, adopting market inducements for manufacturing here, and other reciprocal measures against China should be on the table. Small drones and quantum computing are areas where some of these techniques could be useful. The Chinese drone maker DJI has numerous joint ventures with U.S. companies. We could explore using some of the same tech transfer techniques for Chinese joint ventures here that China uses against us there. Likewise, we could explore options to letting Chinese 5G technology into the U.S.—but only under a forced joint venture or tech transfer structure similar to the Chinese model. In the U.S., a vast amount of data is owned and controlled by just a couple of companies. It is similar to early in the Cold War, when Bell Labs was sitting on a vast array of non-communications patents, many of which they had developed during World War II projects with, for, or funded by the U.S. government. An antitrust case against Bell Labs led to a consent decree opening up its storied patent vaults. This created an explosion of innovation across a broad array of sectors, leading to Texas Instruments, the U.S. semiconductor industry, and really the beginning of Silicon Valley as we know it. The transistor, the solar cell, and the laser, for example, were all freed for development. Opening up monopoly-controlled data vaults, as FCC Chair Tom Wheeler suggests, could eliminate a significant barrier to new industries and firms in the U.S. 3. Lower the cost of re-entry into an industry for the U.S. producers.As discussed, one of the worst outcomes of the China Hack is that we are buying industries high, selling them low, and then trying to get back in when the cost is high again because the industry has been consolidated. If an industry is not consolidated, it cannot be wholly offshored and the barriers to re-entry are much lower. Strategies for preventing abusive consolidation include antitrust and antimonopoly actions, creating equitable access to capital, modifying the current tilt in patent and intellectual-property law, and a more expansive role for the Federal Reserve. During COVID, the Fed has pumped money into the economy by buying corporate bonds from companies like Amazon, Apple, Boeing, Comcast, CVS, Ford, IBM, Oracle, Walmart, and others. The list is long and includes both investment-grade and junk bonds—including junk bonds issued by fossil fuel companies. These investments could be made with a much more strategic purpose. Congress could create a special-purpose vehicle between the Fed and another agency to target key industries that the U.S. needs to get back into. Or the federal government could back loans in targeted industries that China has captured, such as solar manufacturing, as it does with federally backed mortgages. The Federal Reserve could then purchase those loans. Utilizing the Fed doesn’t require raising taxes, because it creates or supports assets that the Fed either sells backs or allows to mature. If these strategic investments are made as the Fed’s current nonstrategic assets mature or are sold and the money is returned to the Fed, it won’t even add to their balance sheet. 4. Pay the price to get back in now, because it will only go up.The cost of getting back into the industries we have lost is likely to only go up as advancements in manufacturing and procedures continue to be made overseas and our skills continue to atrophy. This is going to require courageous leaders in key government positions: Treasury, the Federal Reserve, Commerce, Energy, the U.S. Trade Representative, the Pentagon’s Industrial Policy office, and others. Tools such as special-purpose vehicles, the Defense Production Act, and the International Emergency Economic Powers Act are all available, but without courageous leaders, attempts to change will be overcome by the financial industry and investors, who have a strong incentive in maintaining the status quo. Industries that America created and has since lost that are critical for the future should be targeted and reshored. Printed circuit board, semiconductor, telecommunications, and solar manufacturing are key industries that the U.S. has divested and needs to regain before the growing overseas expertise makes it impossible. The cost of getting back into these industries goes up by the day, so it is imperative that we move quickly. The good news is that bringing industries like these back home has numerous spillover effects, such as good jobs, clean energy, and expanded technical expertise, not to mention eliminating the hidden costs of risky supply chains and dependence on adversarial manufacturing. 5. Create barriers to theft, education placement, marketplace participation, and investment.This is probably the most talked-about strategy and includes things like tariffs, immigration restrictions, and even trade wars. These measures should always be on the table, but with the understanding that while these tools may have the ability to prevent wealth from leaving the U.S., they do not bring it here or create more here. 6. Recruit and welcome immigrants.We may not have a monopoly on genius, but we can attract it here and keep it here. Attracting immigrants educated elsewhere transfers wealth into the U.S. and lowers the education cost to our country of creating a new industry. Some of America’s greatest innovations have famously been created by immigrants. Attracting wealth and lowering costs like this should be a bipartisan issue. With regard to all those Chinese students and workers here, rather than educating and training them for their return to China, encouraging more to stay would be a huge transfer of wealth to us from a direct competitor. I agree with the administration that we are in a competition with China, whether we chose it or not. But, again, winning is not about building more weapons or militarizing the pacific. It is about taking a hard look at our domestic incentive structure and reprogramming our economy. It is not too late to reverse the trend. We simply need the courage and creativity to do so. If you know anyone who might find this interesting or useful, please continue to share, thank you for everything! Lucas Invite your friends and earn rewardsIf you enjoy Lucas’s Substack, share it with your friends and earn rewards when they subscribe.
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EXPERIENCE THE JOURNEY OF... KIM, TIM AND MOLLY MYERS AS THEY TRAVEL TO CHINA TO BRING HOME ANNIE!
Saturday, March 22, 2025
J.D. Vance and Elon Musk re: China
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